Telltale signs still missing

While many view recent events as turning points that indicate an economic recovery is underway, historic evidence fails to confirm that belief. Too many signals are harbingers of further economic trouble.

The usual clues for a renewed upturn include a major advance in the housing sector, the hiring of more temporary workers, lower interest rates, and a long-lasting recovery in stock markets.

Hope that the housing industry has reached bottom rests on the decline in the inventory of unsold houses. However, that primarily reflects discouraged buyers who have removed their listings because of severe price weakness.

Also, while housing starts have picked up for a couple of months, that probably is a momentary shift in a prolonged decline. As the baby boomers decide to move out of their larger homes and to look for smaller accommodations in their senior years, more and more houses will be put on the markets.

Furthermore, it should be recognized that house prices have not really started to correct from the tremendous climb over the past two decades.

There has been absolutely no pickup in employment in the United States, in sharp contrast to much better numbers in Canada.

Still, mass layoffs in both countries are imminent, particularly in the extremely depressed automobile industry.

That, plus the slump in the housing industry and general construction will entail a substantial rise in unemployment.

Interest rates have fallen, but too few are willing to borrow to take advantage of that in view of the heavy debt burdens that many carry. That will prevent numbers of us from borrowing more money, even at current, low interest rates.

Bad news continues to come from the corporate sector, too.

At the present time, the ratio of earnings to share prices is nowhere near the usual, low level that preceded anything more than a fleeting bounce.

Also, earnings this year will be significantly lower than in the previous year, which can be an intimidating factor that faces potential investors.

Commodity prices have also tumbled, and that is ominous for Canadian share prices because raw materials are a very important component of the Toronto Stock Exchange Index.

Many financial institutions, notably hedge funds, are hampered from unloading shares because credit markets are frozen.

If the market were to rise here, they would sell shares to raise cash to improve their balance sheets and meet possible redemptions.

Therefore, it would take a brave – or foolish – forecaster to infer that an economic recovery is about to begin.

It is far from certain that we should become optimistic here and now.

 

 

Bruce Whitestone

Comments